Success, failure pay for more CEOs

Kathy BergenTribune staff reporter

In rosier times, when corporate profits and rising stock prices were regarded as givens, as they were in the not-too-distant past, it was a relatively simple matter to discern which corporate chieftains were delivering the biggest bang for the buck.

Those taking modest pay hikes but delivering handsome stock returns basked in the admiration of the investment community, while those who pulled in megabucks for measly performances were raked over the coals.

But in 2001, when terrorist attacks jolted the nation, battering an already flagging economy and sending the wobbly stock market into a brief tailspin, some of the would-be angels look a little rumpled and some would-be rogues look fairly reasonable.

Some of the Chicago-area chief executives faring best in a Tribune analysis of pay-for-performance last year did so because their cash pay was slashed when they missed financial performance goals, even as their stock performed well on investor expectations of better days ahead.

And a number of those faring poorly say the disparity between their pay and performance in 2001 will come home to roost in 2002, in the form of bonuses that will be slashed or eliminated based on year-earlier performance.

To be sure, pay appears out of sync with performance in some cases, without any adjustment in sight. But overall, pay-for-performance appears to be the modus operandi in many corporate suites, both here and nationally.

"A large group of CEOs, if not the supermajority, then certainly a majority, seem to be playing by the rules," said Patrick McGurn, director of corporate programs at Institutional Shareholder Services in Rockville, Md.

"Boards adopted standards, at least on short-term cash compensation, and many didn't change them when the market turned south, and the economy did as well."

Shifting compensation

Of course, some did shift the ground rules, McGurn said, finding alternative ways to keep their top executives enriched. And they are likely to get an earful from investors.

And there are cases in which CEOs appear to share the pain by taking cuts in salary and bonus, only to receive mammoth stock option grants, which can pay huge sums down the road if stock prices rise, he noted.

Overall, "pay has not gone down as much as performance has," said Nell Minow, editor of The Corporate Library, a Web site that analyzes executive compensation.

"Go figure--who would've predicted that one?" she quipped.

Still, many top executives in Chicago are taking cuts in cash pay as their corporate performance falters.

Several of the CEOs who ranked best on the Tribune's pay-for-performance analysis--which compares rankings of stock return and change in cash compensation--fall into this category. And some of last year's worst performers are some of this year's best--and vice versa.

Top-ranked Neil Nicastro, head of Midway Games Inc., received no bonus and opted to take no salary in fiscal 2001, the second consecutive year that the company operated at a loss. He received some cash compensation from retirement plan accruals, but in lieu of salary, he took 300,000 stock options.

His pay package had called for a bonus of 2 percent of pretax profits.

"It's crystal clear: You make money, you get paid," said company spokesman Miguel Iribarren.

Investors, meanwhile, were pushing up the stock price on optimism that the company's transition to home video games from arcade games will begin to pay off.

Similarly, Stuart Scott, chief executive at Jones Lang LaSalle in 2001, saw his bonus evaporate when a slump in the cyclical real estate services industry led to earnings that were flat from a year-earlier and well below the firm's target for 2001.

"That killed my bonus, and quite appropriately so," Scott said. "The recession last year, which we hadn't counted on, and then Sept. 11--those things weren't our fault, but they caused us to miss our numbers.

"Some companies, if they don't think it's the CEO's fault, they pay him anyway," said Scott, who ranked fifth-best on pay-for-performance. "We don't believe in that."

Discretionary pay

But other local companies view it somewhat differently, with no apologies.

At Des Plaines-based United Stationers Inc., Chief Executive Randall Larrimore wasn't slated to receive a bonus because the company missed its earnings-per-share targets. But the board of directors opted to give him a discretionary bonus of $300,000, less than half the previous year's amount.

"While we didn't hit the earnings-per-share target that was part of the incentive plan, the economy and a lot of things impacted that," Larrimore said. His cash package fell 16 percent, and his company's stock was up 40 percent, ranking him third-best on pay-for-performance.

"The board ended up giving me a bonus, a discretionary bonus ... in respect of other financial results," he said. Specifically, the board cited improvements in working capital and share price, and leadership in a corporate restructuring.

Another of the CEOs at the top of the list, George Bayly of Ivex Packaging Corp., took a pay cut while his stock was up nearly 74 percent. In 2000, he was near the bottom of the list, with a nearly 50 percent raise, while the stock crept slightly higher.

At the other end of the spectrum, some CEOs whose pay hikes were high relative to stock performance in 2001 said they will pay the piper in 2002.

Melvyn Bergstein, chief executive at DiamondCluster International Inc., ranked second-worst on the pay-for-performance measure, because his cash pay in the company's fiscal year ending March 31, 2001, rose 6.1 percent, while the company's shares plummeted.

Bad timing

The dot-com crash caused the technology consulting firm's business to fall off considerably in calendar 2001, leading to employee pay cuts and furloughs. And for fiscal 2002, Bergstein said he will not get a bonus and his overall cash pay will drop 66 percent, to $277,343.

Pay packages for A.C. Zucaro of Old Republic and Patrick Ryan of Aon are based on performance in the preceding fiscal year, so pay levels for 2001, a weak year in the industry with soft stock prices, were based on performance in 2000. Zucaro was the top performer on last year's list, with a 37 percent pay cut, while share price more than doubled.

But the industry's difficulties in 2001 will come home to roost in 2002 pay packages, with Aon's compensation committee already deciding against awarding bonuses.

"Absolutely, we pay on performance at Aon," said a company spokesman.

The executive whose pay hike was biggest relative to stock performance was William Foote of USG Corp., which entered Chapter 11 bankruptcy protection in June because of asbestos-related litigation.

Foote's cash pay spiked because he received a retention bonus to replace stock-based compensation that became worthless when share prices plunged after the bankruptcy filing.

Without an adequate retention program in place, competitors and others would cherry-pick the company's top talent, the company has said.

Naperville-based Nicor Chief Executive Thomas L. Fisher ranked third-worst on pay-for-performance, but a company spokesman said pay is pegged to more than stock appreciation.

"The stock performance is just one component of Mr. Fisher's pay," said spokesman Mark Knox, noting the compensation committee also considers leadership abilities, community activities and industry pay levels, among other things.